Despite the intensification of the polemics surrounding the 1MDB issue, the rating agency Moody’s Investors Service said this would only have a limited impact on Malaysia’s credit rating.

Its senior analyst and vice president Christian de Guzman said this is because the government is unlikely to roll back its fiscal reforms as a result of the issue, including the implementation of Goods and Services Tax (GST), the abolition of fuel subsidies, and other efforts to rein in Malaysia’s sovereign debt.

“I’d guess what was unforeseen from our point of view was the escalation of political risks, now with former prime minister Dr Mahathir (Mohamad) ( photo ) actively calling the prime minister to step down.

“This has, to us, a limited impact on the sovereign rating because we don’t see policy changing irrespective to what happens to the position of the prime minister,” he told a press conference in Kuala Lumpur this afternoon.

 

Malaysia is rated as ‘A3 positive’ by the agency, signifying that the nation’s credit is deemed “to be upper-medium grade and subject to low credit risk”, and is likely to improve in the medium term.

 

The number ‘three’ means that Malaysia is on the lower-end of the A-category, which in turn is worse than the AAA and AA categories, but better than six other categories ranging from BAA to C.

 

In studying 1MDB’s impact on Malaysia’s outlook, de Guzman  said the question the agency seeks to answer is whether government assistance given to the fund would become large enough to derail the government’s efforts to reduce its debts.

 

He noted that of 1MDB’s RM42 billion debt, only RM5.8 billion is explicitly guaranteed by the government, while another RM3 billion had a ‘letter of support’ from the government.

 

In addition, the government had given 1MDB RM950 million earlier this year as ‘standby credit’ .

 

“The question that we are asking ourselves is (whether) the magnitude of support will eventually derail the trend of fiscal consolidation, and that may cause us to relook our outlook.”

 

Point of contention

Previously, the letter of support had been a point of contention over whether it amounted to a guarantee of the RM3 billion bond 1MDB had issued via a subsidiary.

 

De Guzman ( photo ) said Moody’s deemed the letter to be “not as strong as an explicit guarantee”, but acknowledged that its conditions are strongly worded.

 

To a question on what kind of developments in the 1MDB issue would cause a downgrade of Malaysia’s rating, de Guzman said he could not answer the question due to “significant degrees of opacity” surrounding the state investment company.

 

“We don’t know the kinds of support that could be forthcoming. We just know, or acknowledge, that it would be very politically difficult to extend that support.

 

“So it is really hard to comment on how developments in 1MDB could affect the rating at this moment,” he said.

 

On a related matter, de Guzman said Malaysia’s growing contingent liabilities are a cause for concern but historically, these guarantees have been quite safe.

 

“(It is) a seal of good housekeeping, if you will, given that none of these guarantees have crystallised on the government’s balance sheet. Of course, there is just the question of 1MDB right now, with its RM5.8 billion,” he said.

 

However, he pointed out Malaysia also has a history of bailing out companies for which it has not given explicit guarantees for, such as Proton, Malaysia Airlines, and the Port Klang Free Zone.

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